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Minister “at a loss” to understand use of HRA borrowing headroom 02/08/2018 Labelled as Development, Finance

Before Parliament went off for its summer holidays, the new Housing Minister Kit Malthouse said he was "at a loss" to understand why councils don't use their full borrowing capacity in the Housing Revenue Account (HRA) to build new homes.


In an answer given in Parliament on 23 July 2018 to a question from Alex Norris MP for Nottingham North regarding removal of the borrowing cap on the HRA, the new Housing Minister said:

"As a person who is new in post, I am happy to look at the specifics of that matter, but we have obviously given an extra £1 billion of funding to local authorities to bid into, and we are inviting bids at the moment for housing revenue account expansion. I would also point out that, across the whole piece, local authorities already have about £3.6 billion of headroom, and I am at a loss to understand why they are not using it."(Hansard 23 July 2018 Column 712)


In response to his comments ARCH has written to the new Minister to draw his attention to the detailed piece of research into the extent of so called "under- utilised" HRA borrowing headroom amongst authorities in England, the results of which were published late last year in our report "Raising the Roof".


The results of that research, undertaken independently on behalf of ARCH and the NFA by Savills, counters the Minister's suggestion of under-utilisation of HRA borrowing headroom, demonstrating that the overwhelming majority of local authorities are operating their housing business plan within 20% of their HRA borrowing cap - a level at which housing associations might be expected, by both funders and the Social Housing Regulator, to seek extended funding facilities.


Our report identifies that the maintenance of some degree of headroom beneath the HRA debt cap is essential to prudent financial management. The Regulator expects housing associations to maintain a financial buffer and rates their financial viability accordingly and the same financial principles should be applied across the housing sector. 


We have also highlighted to the new Minister that given ongoing uncertainties around the implementation of a High-Value Asset Levy, the imposed mandatory reductions in social rents over the last 4 years and the impact of Universal Credit on councils' rental income streams, it is not surprising we have seen councils take a sensible, if albeit cautious approach in maintaining a reasonable degree of headroom against their HRA borrowing caps.


Raising the Roof identifies that the Right to Buy policy remains another major reason why councils might be discouraged from investing via borrowing to build new council housing. Specifically, councils are concerned at the high level of discounts and the operation of the rules for the recycling of receipts, as this means in many cases they are unable to replace the homes sold (and the rental income lost) on a one-for-one basis.  We acknowledged that the Minister's predecessor Dominic Raab recognised this to some extent when he announced the intention to consult on greater flexibilities in the use of RTB receipts in his Statement to Parliament on 29 March 2018. It is therefore disappointing that some 4 months later the sector is still waiting to see the government's proposals in this regard and we have asked the new Minister to expedite this consultation as a matter of urgency.  


"Raising the Roof" clearly shows that the overwhelming majority of councils are managing their HRA borrowing in the context of prudent housing business planning and that stock-retained councils want to and will invest in new housing, but they require policy clarity, the opportunities and the right climate in which to do so. 


The approach taken by individual councils to borrowing is part of long-term housing business planning, taking into account future income and revenue and capital spending needs over a rolling 30 year cycle. When councils do not spend right up to their debt cap at particular points in that cycle, this is entirely sensible and consistent with the behaviours of any prudent landlord, building in risk buffers and protections, essentially acting like any self-financing business would.


HRA borrowing ceilings are already accounted for in the national accounts and if there was to be a general raising of HRA debt caps, any addition to public debt would only accrue to the extent that HRA borrowing began to exceed the existing prevailing debt caps which have been in place since 2012.


The recent publication of the prospectus for selected lifting of HRA debt caps in areas of high affordability pressures is of course very welcome, but our research shows that there will inevitably always be a degree of borrowing headroom between actual debt and councils' individual HRA debt caps (at whatever level they may be fixed) and we emphasised to the new Minister that there is a strong case to consider an across the board lifting of HRA debt caps, without this necessarily resulting in a significant increase in the actual HRA debt beyond the current borrowing ceilings accounted for by HM Treasury in the national accounts.


We hope the new Minister will find our report and analysis to be helpful, both in understanding why it would not be prudent for all councils to "max out" their HRA borrowing headroom and enable him to give further consideration to how the government can deliver on its promise in the Housing White Paper to "back councils to build" and deliver "a new generation of council housing" by abandoning the idea of a High Value Asset Levy, introducing greater flexibilities in the use of RTB receipts and agreeing to a general raising of HRA debt caps, allowing individual authorities to set their own HRA borrowing and financing limits, within the context of a long-term HRA business plan and in line with the operation of the Local Government Prudential Code.


We await with interest to see how the Minister responds.

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